Wall Street is getting worried about a frothy stock market
The S & P 500 ending the first half of the year at a record high is cause for celebration for many, but some Wall Street pros are worried that investors may be getting too excited. Barclays strategist Stefano Pascale was one of several to warn about “froth” in the market in a note to clients on Tuesday. “The Barclays Equity Euphoria Indicator, a proxy of excessive optimism, is back to levels comparable to earlier peaks this year, and not far from the ‘Meme stock frenzy’ and Dotcom era episodes; SPAC IPO issuance have resuscitated, with issuance so far in the year matching 2023/24 combined; ARKK recently posted [a near record rally], second only to the post Covid surge,” Pascale wrote, referring to Cathie Wood’s ARK Innovation ETF. ARKK YTD mountain Cathy Wood’s Ark Innovation ETF has rallied more than 44% in the past three months. Those periods mentioned by Pascale evoke a handful of stocks that became enduring examples of unbridled speculation, like GameStop in 2021. However, Piper Sandler head of global policy and asset allocation Benson Durham said in a note to clients that the current environment is seeing much broader participation than just a few names favored by retail investors. “Today’s mis-valuations are broad-based across S & P 500 sectors and thereby do not owe to tech, the ‘Magnificent 7,’ etc.,” Durham said. Of course, one old investment adage says that valuation is not a timing tool. After all, the meme-stock mania in 2021 burned some well-established hedge fund managers who were short the frothiest stocks, even if those prices did eventually deflate. “While this seems driven more by liquidity than fundamentals, market bubbles are infamously difficult to predict and can endure far longer than anticipated before correcting,” Pascale at Barclays said. One key variable that could take some air out of the market is the U.S. economy. The latest leg up for the market has come despite data showing that employment growth has slowed and housing demand is weakening. Investors appear to be too optimistic about the economy, according to Wolfe Research chief economist Stephanie Roth. “Markets are pricing in less than a 5% chance of recession according to our models — well below the unconditional probability of 16% (the historical average across all periods). That said, we think the actual risk is closer to 25%,” Roth said in a note to clients. That market optimism could be put the the test soon. ADP private payrolls data for June is due out on Wednesday morning, followed by the Labor Department’s June nonfarm payrolls release on Thursday. — CNBC’s Michael Bloom contributed reporting.
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